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Exchange Rates · Paper 1 — Free Economics SL Practice Questions
1FoundationSAQ-SDetermination of exchange rates8 marksPaper 1~12 min
Country X operates under a freely floating exchange rate system. Recently, there has been a significant increase in demand for Country X's exports of lithium batteries.
(a)
Define the term "freely floating exchange rate". [1 mark]
(b)
Using demand supply for a currency, explain the likely effect of the increase in export demand on the value of Country X's currency. [3 marks]
(c)
Evaluate whether the resulting change in Country X's exchange rate will improve or worsen its overall trade balance. [4 marks]
Solutions
2MasterySAQ-STypes of exchange rate systems: Floating vs fixed4 marksPaper 1~6 min
The Japanese yen (JPY) operates under a floating exchange rate system against the US dollar (USD). In 2023, Japan's central bank unexpectedly raised interest rates while the US Federal Reserve held rates steady. The JPY/USD exchange rate moved from JPY per USD to JPY per USD.
(a)
State what is meant by a floating exchange rate system. [1 mark]
(b)
Using a fully labelled exchange rate for the JPY market, explain how Japan's interest rate rise caused the JPY/USD exchange rate to move from JPY per USD to JPY per USD. [3 marks]
Solutions
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